As expected, wholesalers reported that they continued to hold off on purchases during the month until they got more visibility regarding the expiration of tariffs on tires imported from China. Well, September 26th came and went and Tariff 421 is no more. Further, there was no last minute intervention to extend the measure, which was talked about after the U.S. filed a complaint with the World Trade Organization last month. That said, we have yet to see a material market-wide effect from the tariff’s expiration as dealers sort out what the new lower-priced Chinese imports mean on a larger scale. Falling prices might be welcomed by some dealers though as it could help convince consumers to get off the sidelines and replace the tires that they have been deferring for so long. Indeed, dealers reported that the combination of rising gasoline prices and political uncertainty weighed on consumer confidence during September as they experienced lackluster sales trends. Despite the weak month in September, dealers remain optimistic that business trends will improve, in large part because many consumers have deferred replacement tires so long there is simply no tread left on their tires, which will eventually release the pent-up demand.
Monthly survey
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the September 2012 survey are compared with those of September 2011.
Rough September does not affect optimistic outlook
According to our dealer survey, roughly 58% of passenger tire dealers believed business will improve over the next six months while 25% believed it will stay about the same. Some 17% believed it will worsen. Truck tire dealers were not quite so optimistic, as 40% saw business improving, which is roughly equal to the amount of dealers who saw business staying about level. About 20% felt business would worsen. The important thing here is that the dealers’ outlook did not waver in the face of a rough September. In our view, this is due to the fact that dealers feel that there is significant pent-up demand as consumers have delayed tire purchases. Moreover, dealers continued to note that they are hopeful that we will see more normalized winter weather patterns this year.
September marked by weak unit demand
According to dealer reports, on average, retail sales of new replacement passenger tires were down 8% when compared with September 2011, which represents a sharp deterioration from August when our survey suggested that year-over-year unit sales were only down 1%. Dealer commentary suggests that the looming elections coupled with general economic uncertainty and rising fuel prices weighed on consumer confidence, which was reflected by business trends that could be described as weak and volatile. The weakness was not limited to passenger tires, as truck tire sales declined 6% in September and retreads fell 4% -- both were weaker than August.
Tire prices changed little in September
In comparing September 2012 with August 2012, the average cost for a size 215/60R16 major brand tire fell approximately 1%, which coincided with flat tire prices. On the other end of the spectrum, it appears that the expiration of Tariff 421 has yet to have a material effect on the entire private brand segment, as prices and costs were only off 1%. That said, we believe that an increase of rebate programs by manufacturers reduced effective tire prices by about 2% to 3%.
Pricing gets aggressive on truck tire side
In September 2012, 58% of passenger tire dealers saw pricing as aggressive while 25% saw it as firm. Seventeen percent of the passenger tire dealers saw it as normal. Meanwhile, 64% of truck tire dealers saw pricing as aggressive with the rest split evenly between normal and firm.
Soft demand outpaces dealer destocking as inventory balances grow
The survey indicated that 42% of passenger tire dealers believed inventories were too high (vs. 30% in August), while 50% believed inventories were just right and the remaining 8% believed they were too low. Among truck tire dealers, 46% indicated that inventories were too high (vs. 13% last month), while 45% noted that their tire assortment was in line with current business levels and the remaining 9% said levels were too low. As expected, wholesale shipments were down during the month as dealers tried to work down their inventory in anticipation of lower costs related to the expiration of Tariff 421 on Sept. 26 and expected price concessions related to falling material prices. In sum, despite dealers’ plan to destock, inventories rose. This is likely tied to the volatile demand at retail.
Service business continues to show strength
Dealers who provide automotive service reported that 36% of revenues, on average, were generated by service during September. However, after consistently being a bright spot for dealers in recent months, dealers indicated that revenues from service fell more than 3% in September. Indeed, this marks a significant deterioration from August when business improved 7%.
John Healy and Nick Mitchell are research analysts with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy and Mitchell cover a variety of subsectors of the automotive industry.
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